Jason Stipp: I'm Jason Stipp for Morningstar. We're out in San Francisco visiting with Dodge & Cox today. I'm talking to Charles Pohl. He is a Manager on the Analyst Pick Dodge & Cox Stock and Analyst Pick Dodge & Cox Global Stock. He is going to tell us a little bit about some of the trends that he is seeing in the market and where they are finding opportunity today.

Thanks for joining me, Charles.

Charles Pohl: You're welcome.

Stipp: The first question I have for you, in your March report to shareholders, you wrote that the global economy is in the midst of what may be one of the greatest transformations in modern history, which is a trend that you expect to see continuing over your investment horizon and beyond.

Now, Dodge & Cox, you guys have practiced a time-tested strategy for investing of looking for good quality companies, you have a very strong valuation, consciousness. And I am wondering, given some of the changes that you are seeing in the broader market, does your definition of what a quality company is, has that changed along with some of the changes that you are seeing in the market today? So, when you are looking for companies today, is there anything different from when you were looking for companies 10 years ago?

Pohl: Well, I think our basic approach remains the same, but what has changed over the last decade and maybe even more so over the last two decades is that you've seen this tremendous rise in the emerging markets what we believe is a long-term secular change as a lot of countries that had heavy government intervention in their economies, sort of socialist states in some cases, join the global market and more and more people move from subsistence agriculture to becoming integrated in the global economy. And this is creating some tremendous opportunities for investment and for companies to profit from these changes. And so, that has certainly affected our thinking in terms of how we evaluate companies, and we're actively looking for companies that can have more exposure to emerging markets consumers.

The other thing that's been happening, certainly over the last decade and longer than last decade, is a general rise in global trade and globalization, the fall of trade barriers, the emergence of NAFTA and the European Union, Mercosur in South America, so the falling of trade barriers. And this works to the advantage of companies that are globally competitive, that are world class, and it works to the disadvantage of businesses that may have been protected by those trade barriers within countries. And so, you have to let that factor into your thinking as well. But in general, we continue with our same approach that we've used for decades here.

Stipp: So, given that there could be better growth prospects for companies that do have an emerging markets exposure, I wanted to ask a few question then on valuation because, obviously, an important part of your process is the valuation piece. And I know that you had mentioned to us before that you found different ways to get exposure to emerging markets, including companies domiciled in developed markets that have business in emerging markets.

On the valuation front, are you finding better values in those domiciles by exposure to emerging markets' companies or have you been able to find good values in the emerging markets? What are the valuations looking like among your opportunity set?

Pohl: Well, I think we're finding opportunities in both, the companies that are directly located in emerging markets as well as some that have a lot of revenues and profits from emerging markets but are domiciled in more developed markets. And there are a lot of different factors that you want to consider. One of them is certainly valuation, but the strength of the business franchises is another one.

And then, another factor that enters into our thinking, certainly in some of the emerging markets, is corporate governance and the rule of law. And in some emerging markets with some companies, that's pretty good; in other ones, it's a little sketchier. Usually, in the developed markets, things are a little better on those fronts. And so, that also has to figure into the calculation.

Stipp: Sure. One of the issues that was mentioned at the Morningstar Conference recently is the concern about some of the headwinds in a slower growth in the developed world, and I think a lot of folks have been looking to the emerging markets for better growth prospects. But I think there is also among some investors a concern that, for the emerging markets, one of their major end markets is a developed world. So if the developed world slows, perhaps there might be slowing in some of the emerging markets as well.

When you are thinking in your bottom-up process and analyzing the companies that you are considering for the portfolio, how do you think about the effects of those broader themes, those economic headwinds that could cause a slower growth environment for the globe?

Pohl: Well, we remain bottom-up investors. We always have been focused on analyzing individual companies and individual securities. And so, we've never tried to second guess macroeconomic developments. We're also long-term investors. So, usually, over our time horizon of three to five years, you see some periods of strength and some periods of weakness and it turns to average out over time. So, macroeconomics hasn't been our specialty.

Now that said, in this market it's quite remarkable the degree to which it appears to us that the market is discounting some very little possibility of some very negative economic outcomes. And I think that is creating opportunities for us, particularly on a bottom-up basis. The market also seems to be – there was an article on The Wall Street Journal a couple of weeks ago noting that the correlation between individual stocks is at very, very high levels relative to history. So that basically means that they are all moving together up or down based on people's perception of the macro environment on any given day.

Well, I think that actually can be quite a good environment for a bottom-up stock picker because the individual outcomes of all the companies are not as closely linked as the market seems to be discounting at the moment, and some of that volatility can be exploited by those who take the time to understand the conditions of the individual companies.